Politics has little or nothing to do with the health of O&G companies.  It's the market.  -Skip

Energy Stocks Fall Faster Than Oil Prices

Fed-up investors dump shares after years of disappointment

By Ryan Dezember  Oct. 16, 2019    wsj.com

Horrific. Terrible. Abysmal. The worst. Those are terms equity analysts are using to describe investors’ attitude toward energy stocks.

Shares of exploration-and-production companies, along with oil-field-service firms, have fallen even more than crude prices this year. A five-year slump in oil prices as well as even longer bouts of rock-bottom natural-gas sales and profligate spending has caused investors to sour on the sector.

While U.S. oil prices have lost about 26% over the past year, the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund, a widely cited barometer, has lost nearly half of its value, accounting for dividends. Meanwhile, the PHLX Oil Service Index, a basket of 15 companies that help oil producers unearth oil and gas, is down 54%.

Of 73 U.S.-based exploration-and-production companies tracked by The Wall Street Journal—ranging from the $292-billion-market-cap Exxon Mobil Corp. XOM -0.65% to recently bankrupt EP Energy Corp. EPEGQ -12.62% —only one has shares that have gained value over the past year: Hess Corp. HES -0.38% It has added 0.8% following a huge oil discovery off the coast of Guyana. More than 40 of these companies have lost at least half of their stock market value over the past 12 months.

Service company shares have performed poorly too, from sector leader Schlumberger SLB +1.35% NV, down 45%, to Weatherford International PLC, which basically wiped out shareholders when it filed for chapter 11 bankruptcy protection in June.

“It is clear that sentiment remains as challenging as anything we have ever seen,” wrote analysts with Piper Jaffray’s Simmons Energy after four days of meeting with money managers in Boston and New York. “Interest remains anemic, and there appears a growing consensus that the exploration-and-production business model just won’t ever work (for investors) in a $50-to-$55-a-barrel world.”

West Texas Intermediate futures for November delivery fell 1.5% to $52.81 a barrel on Tuesday. Natural-gas futures, which ended Tuesday at $2.339 per million British thermal units, have recovered some from their worst summer in decades but remain about 28% lower than a year ago.

Investors’ dim view of the oil-and-gas business’ prospects are shared by energy executives.

Each quarter the Federal Reserve Bank of Dallas polls energy executives in its territory, which covers Texas as well as swaths of drilling land in New Mexico and Louisiana. In its most recent survey, published Sept. 25, respondents reported declining production, employment and wages. More than two-thirds said they expected U.S. crude prices to end the year below $60 a barrel.

The third-quarter survey’s business activity index, a broad measure of conditions facing companies in the Dallas Fed’s district, dropped to minus 7.4, from minus 0.6 in the second quarter. That is its lowest level since early 2016, when crude prices dipped below $30 a barrel.

“Lack of Wall Street participation in oil is very apparent,” said one respondent.

Another said: “I expect there will be a number of insolvent companies looking for help in the next six months.”

The bleak landscape has challenged money managers. John Augustine, chief investment officer for the wealth-management arm of Ohio’s Huntington Bancshares Inc., said the bank has steered clear of the exploration-and-production segment.

“It’s under siege almost,” Mr. Augustine said. “It’s tough to go in with conviction.”

Instead, Mr. Augustine and his stock pickers have loaded up on the integrated oil company Chevron Corp. CVX -0.30% and the refiner Valero Energy Corp. VLO +1.14% , which are paying dividend yields of 4.1% and 4%, respectively.

Some investors have advocated and even agitated for consolidation, arguing that duplicative overhead and executive salaries can be eliminated while putting drilling fields in the hands of companies that can operate the most efficiently. Yet the stock market’s reception to recent combinations has been generally poor.

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On Monday, for instance, Parsley Energy Inc., PE -2.91% a favorite of stock analysts that has performed well throughout the oil slump, said it agreed to buy Jagged Peak Energy Inc., JAG -3.70% which operates West Texas drilling fields near Parsley’s. The all-stock deal valued Jagged Peak at $2.3 billion, including debt.

Though the buyer agreed to pay a relatively slim premium to where the smaller company’s shares have recently traded and said it would wring as much as $50 million of annual costs out of the combined businesses, Parsley’s stock lost almost 11% on the day.

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Politics has a great deal to do with it, I would think.

The democratic party has placed a target on the back of the oil and gas industry with all their talk of the industry destroying green new deal and emphasis upon wind and solar energy. People are concerned that 2020 may bring us a democratic president with a democratic congress. Does anyone think that would be good for oil and gas producers?

I am not buying any oil and gas stocks for fear of the democratic party. I am sure I'm not alone.

You should be cautious about investing in O&G stocks but not because of D's.  There are two immutable movers of the value of O&G companies: geology and the market.  For  those who think politics has any substantive part to play, ask yourself this,  With an administration that supports the industry beyond any reasonable measure of government intervention, on top of its many significant historic tax advantages, why is the industry in such deep financial trouble? 

This trouble has zero to do with Green New Deals or the machinations of environmentalists.  It is the confluence of overly aggressive, risk ignoring company management and the completely predictable reaction of the credit market to finally stop chasing any idea that the industry as a whole can turn a profit that is sustainable.  From the beginning this was about borrowing in a rush to lock up unconventional resource play positions by paying exorbitant prices for leases and then having to borrow further to drill money losing wells to hold those leases during a prolonged period of depressed commodity prices.  Political parties and their policies had nothing to do with it.

I agree Skip

Thanks, Gary.  I am afraid that the only good option left to remedy this over supply situation is consolidation.  The majors and super majors, particularly those that are vertically integrated, not only have more capital to weather the low commodity price environment, they do not have to drill to maintain cash flow and service debt.  They can slow the pace of supply until it better matches demand which should boost prices.  I worry about the pressure on field service companies which represent a lot of the jobs in the patch.  Low commodity prices have caused operators to put pressure on them to reduce their prices when many are as vulnerable as the operators.  The trend we are in now is destructive and needs a solution sooner than later.

Indeed Skip. I can remember when lease signing bonuses were reaching $12,000.00/acre in 2008 & 29009, by Cheasapeake. And that was in Sabine parish.

  Another driver of crude oil prices is international. Iran. Plus OPEC production limitations.

   And Schlumberget lost over 2 billion in the third quarter this year

It was a silly season indeed, Martin.  From the $30K+/acre that Petrohawk paid in south Caddo (with a 30% royalty) to the $25K/acre that XTO paid in north Natchitoches Parish.  Then, companies had more acres under short term leases than they could comfortably drill.  They had to drill to hold those leases as the price of natural gas took a tumble.  In June 2008, before drilling really got started, NG was $12.69/mcf.  By June of 2009, it was $3.80/mcf.

Yeah Skip, I really have not thought of that angel. I had often wondered what OPEC+ was going to do, I would not think they can just keep cutting and cutting production while we keep the spigot wide open and pushing! I had this discussion with someone, the other day, and said that the Arabs, Russians, etc.. own their own oil and produce it themselves or control it, with no royalties, little oversite and environmental or safety concerns, probably low pay for there own workforce, basically can produce there oil and gas, a lot cheaper-whereas America is not controlled by one entity, and you can not tell all the oil companies to do anything and letting market conditions control, apparently, is not working. But, you are right, if there was more consolidation then maybe this would be ONE time when it would be good to not have as much competition and a sort of agreement or modified "price fixing" so the industry does not fall apart and it cost more to fix it, than save it after the fact. I don't think anyone thinks, we do not half to have oil and gas, at least for the foreseeable future. 

No need to price fix, simply slow the pace of development.  It is the companies that have no choice but to drill at a pace that will cover their heavy debt obligations and  operating overhead that sustain the supply glut.  I'm not sure what the breakeven crude price is in the Permian and other oil basins but Haynesville operators have an average of $2.30/mcf break even.  So stable natural gas prices around $3 provide an acceptable return on investment and serves to keep natural gas cheap enough for continued electric generation switching and LNG profitability.  You don't have to move the needle much to create a much more healthy situation for natural gas.  Natural gas is a different story than crude.  A much more global equation as you correctly point out. 

Gotta ya, I agree-I think as far as natural gas is concerned, it is just a matter of time before it reaches equilibrium-post build-out of LNG facilities, pipelines, etc...but in the meantime they are in the same boat, to much production and not enough take away, for whatever use.

Too much drilling to HBP leases; too much drilling to fulfill long-term drilling contracts (should-a never signed those), too much natural gas production (aggravated by casinghead gas produced from OIL wells), too much drilling, 'hoping prices go up', too many uncompleted wells that keep the glut going as they are completed, too much $$$ paid for other people's problems - - - too much "Too Much" ...

Lest we forget Aubrey's famous, nearly last words ... "$30,000 an acre is chump change for a lease". He said that not long before the market topped. Aubrey was not the only executive who got caught up in things. Lots of folks (including me) were swept up in its promises.

The Haynesville Rush was a financial mania - almost exactly like a manic episode in a person with bipolar. In both cases reality goes out the window in the up phase, but sooner or later they crash. There will be books written about this for business students. Mania never goes out of style. There is always a new rainbow waiting to be chased.

BUT, the good news is that we as consumers and Americans got a new source of domestic oil and gas with a new technology -  and we got back in control over our own energy destiny. I don't like the ultra low prices, but I am glad to have the big supplies.


Let's not forget that Aubrey made that pronouncement well after CHK had locked up most of their projected core acreage at an average of below $5,000.  He was as much marketing his own position for potential partnership as he was running his late-coming opponents dry of cash.  His JVs with Plains in the Haynesville and Statoil in the Marcellus effectively paid off his original land acquisition costs and derisked his acreage and drilling expense while consigning a cash-rich, anxious, willing partner to each play.

The problem with other people's money is that other people eventually lose their stomach for our rollercoaster industry, and shift their focus to their unending search for higher returns.  Nearly all VC and hedge funds are opportunistic in their strategies - when the opportunity is gone, they pull out as soon as possible and look for the next "big thing".  A scant few are actual partners through the entire cycle of boom and bust, hot and cold.  If an E&P startup or established outfit is based upon OPM alone, it can be a short ride to oblivion - and the costs of E&P of unconventionals is uniquely punishing to those who do not find consistent and sustainable returns.


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